Bulls mine rich vein of optimism

If you thought the QR National float contained some bullish revenue and profit growth forecasts, then you haven’t looked west at
Andrew “Twiggy" Forrest
’s
Fortescue Metals Group
, which is fast becoming the poster child of what Treasurer
Wayne Swan
says is the biggest mining investment boom since the 1850s gold rush.

Forrest copped an emphatic “sell" recommendation from Deutsche Bank yesterday, but that same report forecast Fortescue’s revenue would soar from $US2.57 billion in 2010 to $US4.37 billion in 2011 and $US5.37 billion in 2012. Earnings before interest, tax, depreciation and amortisation are tipped to rise from $US1.28 billion in 2010 to $US2.7 billion this financial year and $US3.26 billion in 2012.

While
QR National
is a proxy for the commodities boom without the downside risks from a price collapse, Fortescue is just a straight out play on China’s growth with all the risks of a collapse as well as the tremendous wealth creation opportunities from the upside.

Swan’s reference to the gold rush in a speech to the New York Stock Exchange could have been dismissed as exuberance from a star-struck ­pollie, but his comments echoed those being made in London around the same time by Macquarie’s commodities guru, Jim Lennon, to the London Metal Exchange.

Lennon says we are back to boom times and his 164-page presentation points to Fortescue being a big winner from the continuing tightness in the supply of iron ore “for the foreseeable future".

Lennon’s key message was that current copper, iron ore, coking coal and thermal coal price levels point to markets that are in deficit, and running at near full capacity on the supply side, setting these markets up for a strong 2011. He is forecasting a slowing in global demand growth in the short term but demand will remain sufficient to force prices higher over the next six to 12 months.

There was some nervousness in markets yesterday after reports the Chinese had introduced lending restrictions by lifting reserve ratios. Lennon sees very little slowing in Chinese construction.

He is careful, however, about making generalisations and says the supply dynamics of individual commodities are very important. “We are most bullish on commodities with limited supply response – hence our neutral/bearish calls on uranium, aluminium and nickel."

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Swan’s reference to the gold rush being repeated was part of a defence of the mining tax. He quoted some pertinent numbers from the Australian Bureau of Agricultural and Resource Economics estimating the current pipeline of resource projects in Australia was nearly $360 billion.

Santos
has added its voice to the business chorus for a carbon price with a compelling presentation to the Carbon Expo 2010 conference in Melbourne on the positive impact a carbon price would have on the economics of gas-fired baseload power generation in Australia.

The presentation by the company’s vice-president eastern Australia, James Baulderstone, focused on the need for critical decisions to be made soon because more than 70 per cent of Australia’s coal-fired power plants are more than 20 years old with an average plant life of 40 years.

Power generation accounts for 35 per cent of the country’s greenhouse gas emissions. The emissions from coal-fired plants are exacerbated by the heavy use of black coal in NSW and Queensland and brown coal in Victoria.

New baseload gas power stations produce less than 0.4 tonnes of CO2 per MWh, which is about a third of the emissions from existing brown coal stations.

Gas-fired baseload stations use a fraction of the water needed to run a coal baseload alternative. Baulderstone says natural gas could, by 2050, underwrite a 20 per cent reduction of carbon emissions from power generation over 2000 levels while still ­doubling the electricity produced.

But without a carbon price, Baulderstone says gas-fired power for baseload energy is slightly more expensive than coal.

A carbon price of $20 a tonne would put gas baseload on par with black coal and be less expensive than brown coal, and based on
Ross Garnaut
’s modelling would only lead to a small increase in residential electricity bills.

A carbon price changes the dynamics of the emissions reduction debate as well as the economics of building gas-fired power stations. A gas-fired power plant used to supply peak load power of 550 megawatts to 600 megawatts costs about $600 million, whereas a baseload gas-fired station costs about $1 billion.

Open cycle plants can be converted to combined gas cycle for baseload power so they provide “optionality" over a carbon price, according to Fitch Ratings, which estimates that $7.8 billion may be invested in gas-fired generation over six years.

Santos has a gas-fired power station site in Victoria, north of Port Fairy, which is awaiting environmental approvals.

It is entirely appropriate that Santos’s pitch for a carbon price was made in Victoria. Victorian Premier
John Brumby
, who goes to the polls on November 27, could accelerate carbon reduction simply by proceeding with his plan to shut down a quarter of the output of the Hazelwood brown coal power station.

Santos chief executive
David Knox
is not on the business round table appointed by the Gillard government to advise its multi-party climate change committee.